Exercise 3-2
1. The direct materials and direct labor costs listed in the exercise would
have been recorded on four different documents: the materials
requisition form for Job W456, the time ticket for Jamie Unser, the time
ticket for Melissa Chan, and the job cost sheet for Job W456.
2. The costs for Job W456 would have been recorded as follows:
Materials requisition form:
Blanks
Nibs
Quantity
20
480
Unit Cost
$15.00
$1.25
Total Cost
$300
600
$900
Time ticket for Jamie Unser
Started
Ended
11:00 AM 2:45 PM
Time
Completed
3.75
Rate
Amount
Job Number
Rate
Amount
Job Number
$9.60
$36.00
W456
Time ticket for Melissa Chan
Started
Ended
8:15 AM 11:30 AM
Time
Completed
3.25
Job Cost Sheet for Job W456
Direct materials............
Direct labor:
Jamie Unser ..............
Melissa Chan .............
$900.00
36.00
39.65
$975.65
$12.20
$39.65
W456
Exercise 3-5
a. Raw Materials ....................
Accounts Payable ..........
80,000
b. Work in Process .................
Manufacturing Overhead ....
Raw Materials ...............
62,000
9,000
c. Work in Process .................
Manufacturing Overhead ....
Wages Payable .............
101,000
11,000
d. Manufacturing Overhead ....
Various Accounts ..........
175,000
80,000
71,000
112,000
175,000
Exercise 3-9
1. Actual direct labor-hours...........................
× Predetermined overhead rate ................
= Manufacturing overhead applied ............
Less: Manufacturing overhead incurred .....
Manufacturing overhead underapplied .......
11,500
$18.20
$209,300
215,000
$ (5,700)
$5,700
2. Because manufacturing overhead is underapplied, the cost of goods sold
would increase by $5,700 and the gross margin would decrease by
$5,700.
Exercise 6-3
1. The profit graph is based on the following simple equation:
Profit = Unit CM × Q − Fixed expenses
Profit = ($16 − $11) × Q − $16,000
Profit = $5 × Q − $16,000
To plot the graph, select two different levels of sales such as Q=0 and
Q=4,000. The profit at these two levels of sales are -$16,000 (=$5 × 0
− $16,000) and $4,000 (= $5 × 4,000 − $16,000).
Profit Graph
$5,000
$0
Profit
-$5,000
-$10,000
-$15,000
-$20,000
0
500
1,000 1,500 2,000 2,500 3,000 3,500 4,000
Sales Volume in Units
Exercise 6-5
1. The following table shows the effect of the proposed change in monthly
advertising budget:
Sales With
Additional
Current Advertising
Sales
Budget
Difference
Sales .............................. $180,000 $189,000
Variable expenses ........... 126,000
132,300
Contribution margin ........
54,000
56,700
Fixed expenses ...............
30,000
35,000
Net operating income ...... $ 24,000 $ 21,700
$ 9,000
6,300
2,700
5,000
$ (2,300)
Assuming no other important factors need to be considered, the
increase in the advertising budget should not be approved because it
would lead to a decrease in net operating income of $2,300.
Alternative Solution 1
Expected total contribution margin:
$189,000 × 30% CM ratio..................
Present total contribution margin:
$180,000 × 30% CM ratio..................
Incremental contribution margin ...........
Change in fixed expenses:
Less incremental advertising expense .
Change in net operating income............
$56,700
54,000
2,700
5,000
$ (2,300)
Alternative Solution 2
Incremental contribution margin:
$9,000 × 30% CM ratio .....................
Less incremental advertising expense ....
Change in net operating income............
$2,700
5,000
$ (2,300)
Exercise 6-5 (continued)
2. The $2 increase in variable expense will cause the unit contribution
margin to decrease from $27 to $25 with the following impact on net
operating income:
Expected total contribution margin with the
higher-quality components:
2,200 units × $25 per unit .....................
Present total contribution margin:
2,000 units × $27 per unit .....................
Change in total contribution margin...........
$55,000
54,000
$ 1,000
Assuming no change in fixed expenses and all other factors remain the
same, the higher-quality components should be used.
Exercise 6-6
1. The equation method yields the break-even point in unit sales, Q, as
follows:
Profit =
$0 =
$0 =
$3Q =
Q=
Q=
Unit CM × Q − Fixed expenses
($15 − $12) × Q − $4,200
($3) × Q − $4,200
$4,200
$4,200 ÷ $3
1,400 baskets
2. The equation method can be used to compute the break-even point in
dollar sales as follows:
CM ratio =
=
Unit contribution margin
Unit selling price
$3
= 0.20
$15
Profit =
$0 =
0.20 × Sales =
Sales =
Sales =
CM ratio × Sales − Fixed expenses
0.20 × Sales − $4,200
$4,200
$4,200 ÷ 0.20
$21,000
3. The formula method gives an answer that is identical to the equation
method for the break-even point in unit sales:
Unit sales to break even =
=
Fixed expenses
Unit CM
$4,200
= 1,400 baskets
$3
4. The formula method also gives an answer that is identical to the
equation method for the break-even point in dollar sales:
Dollar sales to break even =
=
Fixed expenses
CM ratio
$4,200
= $21,000
0.20
Exercise 8-3
Activity Cost Pool
Caring for lawn ....................
Caring for garden beds–
low maintenance ...............
Caring for garden beds–high
maintenance .....................
Travel to jobs.......................
Customer billing and service .
Estimated
Overhead
Cost
Expected Activity
$72,000
$26,400
150,000
20,000
$41,400
15,000
$3,250
$8,750
12,500
25
square feet of
lawn
square feet of low
maintenance beds
square feet of high
maintenance beds
miles
customers
Activity Rate
$0.48 per square foot of
lawn
$1.32 per square foot of low
maintenance beds
$2.76 per square foot of high
maintenance beds
$0.26 per mile
$350 per customer
The activity rate for each activity cost pool is computed by dividing its estimated overhead cost by its
expected activity.
Exercise 8-4
K425
Activity Cost Pool
Supporting direct labor .........
Machine processing ..............
Machine setups ....................
Production orders .................
Shipments ...........................
Product sustaining ................
Total ...................................
M67
Activity Cost Pool
Supporting direct labor .........
Machine processing ..............
Machine setups ....................
Production orders .................
Shipments ...........................
Product sustaining ................
Total ...................................
$6
$4
$50
$90
$14
$840
$6
$4
$50
$90
$14
$840
Activity Rate
per
per
per
per
per
per
direct labor-hour
machine-hour
setup
order
shipment
product
Activity Rate
per
per
per
per
per
per
80
100
1
1
1
1
direct labor-hour
500
machine-hour
1,500
setup
4
order
4
shipment
10
product
1
Activity
ABC Cost
Activity
ABC Cost
direct labor-hours
machine-hours
setups
order
shipment
product
direct labor-hours
machine-hours
setups
orders
shipments
product
$ 480
400
50
90
14
840
$1,874
$ 3,000
6,000
200
360
140
840
$10,540
Exercise 8-5
Sales ($1,850 per standard model glider × 20 standard model gliders + $2,400
per custom designed glider × 3 custom designed gliders)
Costs:
Direct materials ($564 per standard model glider × 20 standard model gliders
+ $634 per custom
designed glider × 3 custom designed gliders) .....
Direct labor ($19.50 per direct labor-hour × 26.35 direct labor-hours per
standard model glider × 20 standard model gliders + $19.50 per direct
labor-hour × 28 direct labor-hours per custom designed glider × 3 custom
designed gliders)...............................................
Supporting direct labor ($26 per direct labor-hour × 26.35 direct labor-hours
per standard model glider × 20 standard model gliders + $26 per direct
labor-hour × 28 direct labor-hours per custom designed glider × 3 custom
designed gliders)...............................................
Order processing ($284 per order × 4 orders) .......
Custom designing ($186 per custom design × 3 custom designs)
Customer service ($379 per customer ×
1 customer) ......................................................
Customer margin....................................................
$44,200
$13,182
11,915
15,886
1,136
558
379
43,056
$ 1,144
Exercise 12-2
1.
Margin =
=
2.
Net operating income
Sales
$600,000
= 8%
$7,500,000
Turnover =
=
Sales
Average operating assets
$7,500,000
= 1.5
$5,000,000
3. ROI = Margin × Turnover
= 8% × 1.5 = 12%
Exercise 12-3
Average operating assets ......................
£2,800,000
Net operating income............................
Minimum required return:
18% × £2,800,000 .............................
Residual income ...................................
£ 600,000
504,000
£ 96,000
Exercise 12-4
1. Throughput time = Process time + Inspection time + Move time +
Queue time
= 2.7 days + 0.3 days + 1.0 days + 5.0 days
= 9.0 days
2. Only process time is value-added time; therefore the manufacturing
cycle efficiency (MCE) is:
MCE =
Value-added time 2.7 days
=
= 0.30
Throughput time
9.0 days
3. If the MCE is 30%, then 30% of the throughput time was spent in
value-added activities. Consequently, the other 70% of the throughput
time was spent in non-value-added activities.
4.
Delivery cycle time = Wait time + Throughput time
= 14.0 days + 9.0 days
= 23.0 days
5. If all queue time is eliminated, then the throughput time drops to only 4
days (2.7 + 0.3 + 1.0). The MCE becomes:
MCE =
Value-added time 2.7 days
=
= 0.675
Throughput time
4.0 days
Exercise 13-3
1.
Cost of purchasing .......................
Direct materials ............................
Direct labor ..................................
Variable manufacturing overhead ..
Fixed manufacturing overhead,
traceable1..................................
Fixed manufacturing overhead,
common....................................
Total costs ...................................
Difference in favor of continuing to
make the carburetors .................
1
Per Unit
Differential
Costs
Make Buy
$14
10
3
$35
2
$29 $35
15,000 units
Make
Buy
$210,000
150,000
45,000
$525,000
30,000
$435,000 $525,000
$6
$90,000
Only the supervisory salaries can be avoided if the carburetors are
purchased. The remaining book value of the special equipment is a
sunk cost; hence, the $4 per unit depreciation expense is not
relevant to this decision.
Based on these data, the company should reject the offer and should
continue to produce the carburetors internally.
2.
Make
Buy
Cost of purchasing (part 1) ............................
$525,000
Cost of making (part 1) ................................. $435,000
Opportunity cost—segment margin foregone
on a potential new product line ................... 150,000
Total cost...................................................... $585,000 $525,000
Difference in favor of purchasing from the
outside supplier ..........................................
$60,000
Thus, the company should accept the offer and purchase the
carburetors from the outside supplier.
Exercise 13-4
Only the incremental costs and benefits are relevant. In particular, only the
variable manufacturing overhead and the cost of the special tool are
relevant overhead costs in this situation. The other manufacturing
overhead costs are fixed and are not affected by the decision.
Total
for 20
Per Unit Bracelets
Incremental revenue ............................. $169.95 $3,399.00
Incremental costs:
Variable costs:
Direct materials ............................... $ 84.00 1,680.00
Direct labor .....................................
45.00
900.00
Variable manufacturing overhead .....
4.00
80.00
Special filigree .................................
2.00
40.00
Total variable cost .............................. $135.00 2,700.00
Fixed costs:
Purchase of special tool ...................
250.00
Total incremental cost...........................
2,950.00
Incremental net operating income .........
$ 449.00
Exercise 13-5
1.
(1)
(2)
(3)
(4)
(5)
Contribution margin per unit...........................
Direct material cost per unit ...........................
Direct material cost per pound........................
Pounds of material required per unit (2) ÷ (3) .
Contribution margin per pound (1) ÷ (4) .........
A
B
$54 $108
$24 $72
$8
$8
3
9
$18 $12
C
$60
$32
$8
4
$15
2. The company should concentrate its available material on product A:
Contribution margin per pound (above) .
Pounds of material available..................
Total contribution margin ......................
A
B
C
$
18 $
12 $
15
× 5,000 × 5,000 × 5,000
$90,000 $60,000 $75,000
Although product A has the lowest contribution margin per unit and the
second lowest contribution margin ratio, it is preferred over the other
two products because it has the greatest amount of contribution margin
per pound of material, and material is the company’s constrained
resource.
3. The price Barlow Company would be willing to pay per pound for
additional raw materials depends on how the materials would be used.
If there are unfilled orders for all of the products, Barlow would
presumably use the additional raw materials to make more of product A.
Each pound of raw materials used in product A generates $18 of
contribution margin over and above the usual cost of raw materials.
Therefore, Barlow should be willing to pay up to $26 per pound ($8
usual price plus $18 contribution margin per pound) for the additional
raw material, but would of course prefer to pay far less. The upper limit
of $26 per pound to manufacture more product A signals to managers
how valuable additional raw materials are to the company.
If all of the orders for product A have been filled, Barlow Company
would then use additional raw materials to manufacture product C. The
company should be willing to pay up to $23 per pound ($8 usual price
plus $15 contribution margin per pound) for the additional raw materials
to manufacture more product C, and up to $20 per pound ($8 usual
price plus $12 contribution margin per pound) to manufacture more
product B if all of the orders for product C have been filled as well.
Exercise 14-4
1. The project profitability index for each proposal is:
Proposal
Number
A
B
C
D
Net Present
Value
(a)
$36,000
$38,000
$35,000
$40,000
Investment
Required
(b)
$90,000
$100,000
$70,000
$120,000
Project Profitability
Index
(a) ÷ (b)
0.40
0.38
0.50
0.33
2. The ranking is:
Proposal Project Profitability
Number
Index
C
A
B
D
0.50
0.40
0.38
0.33
Note that proposal D has the highest net present value, but it ranks
lowest in terms of the project profitability index.
Exercise 14-5
1. The payback period is determined as follows:
Year Investment Cash Inflow
1
2
3
4
5
6
7
8
9
10
$15,000
$8,000
$1,000
$2,000
$2,500
$4,000
$5,000
$6,000
$5,000
$4,000
$3,000
$2,000
Unrecovered
Investment
$14,000
$20,000
$17,500
$13,500
$8,500
$2,500
$0
$0
$0
$0
The investment in the project is fully recovered in the 7th year. To be
more exact, the payback period is approximately 6.5 years.
2. Because the investment is recovered prior to the last year, the amount
of the cash inflow in the last year has no effect on the payback period.
Exercise 14-6
This is a cost reduction project, so the simple rate of return would be
computed as follows:
Operating cost of old machine ....................
Less operating cost of new machine ...........
Less annual depreciation on the new
machine ($120,000 ÷ 10 years)...............
Annual incremental net operating income ...
$ 30,000
12,000
12,000
$ 6,000
Cost of the new machine ...........................
Scrap value of old machine ........................
Initial investment ......................................
$120,000
40,000
$ 80,000
Simple rate = Annual incremental net operating income
of return
Initial investment
=
$6,000
= 7.5%
$80,000